Here's Why LinkedIn Might Be a Better Investment Than Twitter

LinkedIn (NYSE: LNKD)
and Twitter (NYSE: TWTR) shares have sold off by huge margins this
year: LinkedIn shares are down 42% year to date, while Twitter's
shares are down 37% this year

They are the fastest growing social media companies today. But,
LinkedIn's top-line growth is showing signs of slowing down. It
fell to 46% in the first quarter of fiscal 2014, from an average
yearly growth of 57% in fiscal 2013. Assuming that the company
grows at the top end of its guidance, then it will finish fiscal
2014 with a revenue of $2.08 billion, or a 36% growth.

The
Motley Fool

What's going on at LinkedIn?LinkedIn
managed to make a profit in seven out of the eight last quarters
between 2012-2013, before reporting a net loss of $13.4 million
in the first quarter of the current fiscal year. LinkedIn is
facing the bugaboo of many companies experiencing high-revenue
growth: spiraling sales and marketing costs.

The company spent $510 million, or 34%, of its 2013 revenue, on
sales and marketing expenses. In the first quarter of fiscal
2014, growth in sales and marketing costs outpaced revenue
growth: 52% vs. 46%. Product development costs, the company's
second-largest expense category, grew 49% during the quarter, 3
percentage points faster than revenue growth. Oddly, LinkedIn's
general and administrative expenses, its third largest category,
grew 74%.

LinkedIn's user base grew 36% during the quarter compared to last
year, but its page views grew just 5%, indicating a rather
worrying lack of user engagement.

The bright spot in that rather flat report was that the company
expects its sales and marketing expenses for the full year as a
percentage of revenue to be below last year's figure of 34%.

Although the company's stock-based compensation in fiscal 2014 is
expected to grow to $305 million from $193.9 million last year,
it will represent ''just'' 14.7% of its revenue. In contrast,
Twitter's stock-based compensation of $640 -$690 million for the
current year represents about 54% of its expected 2014 revenue.

LinkedIn has more than $2 billion in cash and short-term
securities, while Twitter is cash-flow negative.

Twitter's Achilles' heelWhile most of
LinkedIn's problems look like temporary ones that the company is
likely to outgrow, Twitter's case is not as easy. The bad part is
that some of Twitter's biggest problems are not necessarily of
its own making, and there isn't much the company can do about
them. Let's have a look at three of these reasons.

1. Poor monetization rates for international
usersTwitter's business exhibits an odd dichotomy.
The company has far more international users (non-U.S.) than
domestic ones (U.S.): 186.8 million vs. 54.1 million. While there
is nothing unusual about this, the worrying part is that
international users account for just 26% of the company's
revenue. Non-U.S. users have been growing 1.5 times faster than
U.S. users: 33% vs. 21%.

Twitter's advertising revenue per 1,000 timeline views stands at
$3.80 in the U.S. and just $0.60 for the rest of the world.

Assuming that 80% of the U.S. population will eventually become
Twitter users ( a very generous assumption), and growth for both
local and international segments continue at the current rates,
the U.S. market will be fully covered in just eight years, after
which the rest of the company's growth will have to come from
international markets. It's very likely that U.S. growth will max
out much sooner than the eight years we have assumed here,
possibly in just five years.

With such poor monetization rates for international users, the
company could be facing a revenue cliff in a very short period of
time.

Twitter's reprieve, however, might come as smartphone adoption
rates in the developing economies continues to increase.
Currently, a huge percentage of these users are viewing Twitter
through feature phones, which are not very advertiser friendly.
But assuming that smartphone adoption in these countries helps to
double their revenue per 1,000 timeline views to $1.20 in about
five years, it will still be far short of the U.S. average.

2. Crowded online advertising
industry
Twitter happens to be a tiny player in a crowded online
advertising industry. The company has roughly 1% market share vs.
51% for Google (NASDAQ: GOOG) and 11%
forFacebook (NASDAQ: FB) . There are a raft of other top players in
this industry, too,
including Yahoo, Baidu,
LinkedIn, and Yelp. Facebook can sell its
users' data to advertisers; LinkedIn is busy steamrolling
human-resource industries with its profiles and content, while
Google is busy growing its already dominant market share in
online advertising. The space looks quite hostile for Twitter.

Twitter shares still look quite expensive even after the big
sell-off this year.

The
Motley Fool

3. Stock-based compensation
Twitter's stock-based compensation for its executives and
employees is a major drag on its bottom line. The company
reported a net loss of $645.3 million in fiscal 2013, after
taking a $600.3 million hit from stock-based compensation. The
situation is not expected to improve in fiscal 2014 when the
company will dole out stock-based compensation amounting to $640
million-$690 million.

Foolish bottom lineTwitter shares seem to
be priced for a lot of growth in the coming years. But with the
company making so little money from its international markets,
and growth in its core U.S. market likely to hit a ceiling soon,
it's going to be difficult for the company to maintain good
growth five years or so down the line. LinkedIn is more likely to
outgrow its problems sooner than Twitter, and is therefore the
better long-term investment.